Thursday, July 5, 2012

Special Report: Petronas chafes at its role as Malaysia's piggy bank

July 01, 2012|Niluksi Koswanage and Emily Kaiser | Reuters

KUALA
LUMPUR (Reuters) - State-owned oil company Petronas is tired of being
Malaysia's cash trough. Its growing pique at the government flared into
public view here in early June at the World Gas Conference.

Chief
executive Shamsul Azhar Abbas took to the stage and declared that the
government's policy of subsidizing fuel was plain wrong. A murmur ran
through the crowd - his boss, Prime Minister Najib Razak, was sitting in
the front row.

Moments
later, Najib went to the podium himself to remind everybody that the
subsidies - for which Petronas foots the bill - have "social-economic
objectives."

The
subtext of that rejoinder: Malaysians pay among the lowest electricity
rates and petrol-pump prices in Asia. While the government has vowed to
"rationalize" that, it's highly unlikely to happen before elections
expected in a few months.

The
polite but pointed disagreement was the latest sign of assertiveness
from an oil company that prime ministers have treated as a piggy bank
for pet projects since it was established in 1974.

Interviews
with current and former officials and an examination of Petronas and
government documents show that strains have been building behind the
scenes over how much money the company hands over to the government in
the form of fuel subsidies, dividends and taxes.

Financial
data reviewed by Reuters show the government has increasingly relied on
Petronas's payments - a "dividend" to its sole shareholder - to plug
fiscal deficits that have begun to alarm ratings agencies and analysts.

The
data also show these payments grew over the past several years as oil
prices soared, along with government spending. But Malaysia's official
accounts do not show how the money is being spent - and the government
has steadfastly refused to disclose any details about that.

"WE NEED CASH"

Petronas
is Malaysia's largest single taxpayer and biggest source of revenue,
covering as much as 45 percent of the government's budget. Unlike other
oil-rich nations such as Saudi Arabia, Norway or Brazil, Malaysia runs
chronic, large budget deficits that have expanded even as oil revenues
increased. Last year's fiscal gap, at 5 percent of gross domestic
product, trailed only India's for the dubious distinction of biggest in
emerging Asia, and it may widen this year.

Subsidies
account for a big chunk of the deficit. They have other downsides as
well, Shamsul noted in his speech to the gas conference. "Subsidies
distort transparency, reduce competition and deter new investments," he
said, adding that Petronas paid between 18 billion and 20 billion
ringgit ($5.75-6.35 billion) a year to subsidize gas consumption.

Malaysia
isn't facing a fiscal crisis. Foreign investors eagerly buy Malaysian
government bonds, confident the country's reserves of oil, gas and
foreign currency are deep enough to ensure the debt will be repaid.

Shamsul
argues now is an opportune time to pursue foreign acquisitions on the
cheap as Malaysia's domestic energy supplies deplete. On Thursday, the
company announced it was acquiring its Canadian joint-venture partner,
Progress Energy Resources Corp, for $4.7 billion. More may be in the
offing.

"Mind you, for that to happen, we need cash," Shamsul said in his speech.

The trouble is, the government needs the cash, too.

TOWERS OVER MALAYSIA

Petronas,
Malaysia's only global Fortune 500 company, towers over the Southeast
Asian country - literally and figuratively. Its 88-storey twin towers,
once the world's tallest buildings, dominate the skyline of Kuala
Lumpur.

Petronas's
oil and gas reserves rank 28th in the world, according to data from
PetroStrategies in Plano, Texas, ahead of some better known players such
as Norway's Statoil and CNOOC, China National Offshore Oil Corp.

Unusual
for a state-owned enterprise, Petronas's debt is rated stronger than
the sovereign state's. The company had about $15.6 billion in total
borrowing as of March 31 and counts U.S. insurer Aflac Inc among the
debt holders.

Petronas'
CEO and board, however, serve at the pleasure of the prime minister.
Over the years, prime ministers have tapped into Petronas funds to build
their dream projects and bail out their mistakes. Political leaders
were used to dealing with yes-men in the company, which on Malaysia's
organization chart is part of the prime minister's office.

Now Petronas is trying to say no.

Like
all state-owned oil companies, Petronas is expected to pass along a
share of profit to the government, just as a private sector oil company
pays dividends to shareholders.